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Danger of a new housing bubble?

While the economy is still in recovery, housing supply has been quickly picking up in the past few years. With government construction plans such as the 2013 Forfas Strategy, Capital Investment Plan, and Action Plan for Housing and the Homeless, the housing boom will likely continue if not further accelerate in the years to come.

There are voices of warning: the Fiscal Advisory Council warns that the trends in output and employment in the construction industry may overheat the overall economy, leading to rapidly raising prices and wages. There are also those who believe that output in the construction industry is recovering slowly and still well below what it should be. DKM Economic Consultants recently published a report lamenting a lack of skilled personnel in construction and advocating for greater government funding and availability of apprenticeships.

Acknowledging that the housing supply response is driven by pent up demand, The Fiscal Advisory Council warns that the speed and scale of the response is the real issue. A dramatic increase in supply combined with rising rents similar to that of the mid 2000s could fuel another housing bubble. The council’s warning is back up by evidence such as the 1,170 apartment and €425 million development that the Marlet Property Group and M & G Investments hopes to compete before 2020 and the €300 million worth of commercial loans that Australian lender Pepper Money hopes to extend in Ireland over the next 2 years.

On the other hand, most of the increase in construction are part of governmental plans to combat homelessness and meet the real housing demand. And while Ireland is recovering at the fastest rate in Europe, inflation remains low and construction output in 2015 was estimated at €12.7 billion, compared to the an average of 9.5% across Western Europe. At this point, while it is not necessary to decelerate economic recovery and the curb the rate of growth in housing, it is perhaps good to keep watch on rising rents and the speed of the housing supply response.

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